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Energy

Gasoil and diesel is imported in the largest quantity at 47% of all imported petroleum products, as it is used by Electricité Du Liban (EDL) for public sector electricity generation […]

Gasoil and diesel is imported in the largest quantity at 47% of all imported petroleum products, as it is used by Electricité Du Liban (EDL) for public sector electricity generation and the private sector alike. This is followed by motor gasoline at 26%, the main fuel of the transportation sector. The gasoline market in 2013 was above 1.62 million tons alone, down slightly on 1.68 million in 2012. According to the Association des Importateurs d’Automobiles au Liban (AIA), cars account for 86% of all vehicles on the road, and Lebanon today has a total of 1.6 million vehicles on the road, a rate of ownership of just three persons per vehicle. This is followed by fuel oil in third place, which is used in power stations and industry.

Lebanon’s total petroleum imports represented no less than 27% of the nation’s total imports in 2013, down from 27.6% in 2012. A more concerning statistic is that EDL spent a total of $2.03 billion on fuel oil and gasoline, up from $1.53 billion in 2012, equating to more than one-third of the entire national energy bill.

The energy bill’s gradual growth is due to steadily increasing demand and the price of oil rising nearly 40% since 2008. Given the cost of living crisis in Lebanon, passing this cost onto the average consumer would be both untimely and unjust. Importers stand ready to lobby the Ministry of Energy and Water on the weekly prices of gasoline, gasoil, and diesel, as well as natural gas, in order to defend their own margins and affordability for the consumer. This inevitably only increases the burden of spending and hemorrhage of state revenues at EDL.

Switching to cheaper, natural gas for private energy consumption had proved a promising alternative and remedy following the completion of the Arab Gas Pipeline in 2005, a 1,200-kilometer pipeline constructed at a cost of $1.2 billion. This line became operational in November 2009 when the Syrian Petroleum Company created an offshoot to start providing natural gas to Lebanon. The arrangement came to a standstill in November 2010 due to the uprisings in Egypt and the bombing of the feeder pipeline in the Sinai. However, the Lebanese government still has an ambitious plan to construct GASYLE 2, a mostly offshore pipeline to connect power plants located all along the coast, at Zahrani, Hreiche, Zouk, and Jiyyeh. The plans are currently on hold due to the ongoing regional conflict. Lebanon’s insatiable desire for consumer goods continues to push the amount of electricity required higher and higher. According to the US Energy Information Administration (EIA), Lebanon’s demand for electricity is just above the regional average at 3,500 kWh per person per year, compared to 3,250 kWh across the Middle East and the 8,500 kWh average for wealthier member nations of the Organization for Economic Cooperation and Development (OECD).

The market for gasoil and diesel, and its use by the state and private companies—mainly cement, metals, paper, glass, and ceramics industries that use the fuel for furnaces and boilers—has increased significantly. The private sector’s consumption of diesel and gasoil has grown exponentially, totaling 1.9 million tons in 2012, up on 1.1 million tons on 2011, and most recently 2.9 million for both public and private in 2013.

This strongly implies the intensified smuggling of gasoil and fuel oil into Syria. Numerous upstream and downstream distribution companies that TBY interviewed in 2014, as well as the Lebanese Ministry of Energy and Water, came under scrutiny in 2013 from the UN Security Council and EU authorities for their inability to prevent smuggling, following sightings of Syrian tankers collecting red diesel from the Ministry’s refineries in Zahrani and Tripoli. While the Security Council has not prohibited Lebanon or any other country from conducting such business with the Syrian regime, the Ministry of Energy vehemently denied that gasoil and fuel oil was transported to Syria for military purposes. There is a kind of unwritten agreement between the public and private sectors over who supplies which petroleum products. The state exclusively imports gasoil and diesel for public sector power generation, whereas private companies import fuel oil for industry, jet oil, and gasoil for vehicles in the local market.

The formation of the Association of Petroleum Importing Companies (APIC) in 2007, which is composed of 14 companies, serves the very necessary purpose of uniting and regulating the private sector, particularly in regard to product integrity and service in terminals and petrol stations. The body also negotiates with the administration on issues such as taxation, pricing, and regulation.

In theory, any company can obtain importer status; however, this requires significant investment in coastal terminals and infrastructure on appropriate coastal lands, which few companies can afford, particularly given increasing prices. The majority of the terminals with the largest storage capacities are all located around Dora, including Uniterminals, Medco, Wardieh, and Total, with respective capacities of, 85,000, 65,000, and 54,000 cubic meters.

The most significant way that importers collude is to buy whole tankers on the international market, which enables them to get more competitive prices and mitigate risk in a very volatile market. The Lebanese importers pay for these shipments with letters of credit.

Total is one of the companies leading the fight against product contamination, particularly vigilant in ensuring that downstream companies that bear Total’s brand sell the agreed product. “We bring added value to the end user by giving them not just the product that the government is allowing us to sell, but also an additive product. At our cost, we put additives in our depot that bring additional qualities to the fuel, which makes it better for the environment and with less pollution to the environment,” says Jacques Souplet, Director General of Total Liban.

Total have gone as far as investing in mobile trucks that drop by stations selling their product to check that the product is genuine. It is this kind of action from the larger importers and distribution companies that serves as one of the strongest arguments for further mergers and consolidation in a sector where 14 companies apparently leave great room for unfair competition, particularly in regard to under-the-table dealings with independent and illegal stations.

Lebanon’s big four—Total, MEDCO, and Hypco, and the most recent major player Liquigas—are all undergoing rebranding and diversification campaigns. Total is in the midst of a massive international rebranding operation, for which Lebanon is an ideal choice of location to implement their ethos of transparency and more sustainable products, likewise local companies such as Hypco are modernizing the brand and attempting to move away from being perceived as solely a commodity-focused companies to service-orientated brands.

The oligopolistic structure of the sector means that whether these companies rebrand or not, they are equally likely to maintain their market share. Cartelism and price collusion does not seem to be present amongst the leading importers; this is not; however, to say that the competition is necessarily fair. “Until now, you can say that there is no true cooperation between all importers—they sit, they talk, but they give you a discount under the table,” says Jihad Zouhairy, the General Manager of leading distributor Cogico.

It could be high time for consolidation amongst Lebanon’s APIC members, especially given that several have bid for non-operator rights in Lebanon’s ongoing tenders for oil and gas exploration. Following Lebanon’s fifth consecutive delay in the bidding rounds for operator and non-operator rights of its five open blocks for petroleum exploration, onlookers may not be surprised by a sixth or seventh delay. The two pivotal laws are those related the block delineation and the model exploration and production agreement, both of which for a variety of reasons have been subject to extreme political polarization.

Meanwhile, Lebanon has made solid progress with its pledge to generate 12% of its energy via renewables by 2020. To date, Lebanon generates around 5% to 6% of its electricity from renewable sources, namely hydropower, solar thermal, and recently solar photovoltaic systems. If wind farm projects turn into reality soon, the 12% target could be easily exceeded. According to experts, the capacity for more dams for hydroelectric purposes is low, as few geographic locations are ideal for rapidly channeling water to generate such an amount of hydro-electricity. The jury is still out on whether either of these forms of renewable energy are really capable of generating a quantity of 500 MW. The main challenge will be first to attract the investment.

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